This week, Barclays raised its 2015 and 2016 crude price forecast citing geopolitical tensions, unplanned production outages and lower natural gas prices in the United States. For 2015, the bank believes oil will average $60, jumping to an average $68 for 2016 for brent crude.
This is a fairly bullish outlook given Brent’s current price of only $43. Barclays however isn’t alone. Bank of America Merrill Lynch and Societe Generale are two more major banks that have made upward revisions recently.
Is now finally the time to buy oil stocks? Let’s take a look at the two oil majors that have recently hit multi-year lows: Chevron (CVX) and Royal Dutch Shell (RDS.A).
Chevron
After pulling back dramatically and now yielding nearly 6%, CVX looks pretty attractive. Its integrated model provides operating stability in a time of market turmoil. It’s downstream operations such as its refineries tend to be counter cyclical, boosting profits as its drilling projects feel some pain. For example, in the first half of this year, downstream earnings were $4.4 billion compared to $1.4 billion last year.
CVX also has an exceptionally strong balance sheet. It only has $20 billion in net debt and expects to generate $21 billion in operating cash flow this year despite lower oil prices. Long-term debt to assets is a mere 0.11x. This puts its leverage level lower than nearly all its peers barring Exxon Mobil (XOM).
Declining capex needs should also provide flexibility. After a 13% decline from 2014 levels, CVX should still put enough money back into the business to drive future growth.
For example, the company will devote $14 billion of its capex to key projects where the company has made final investment decisions and the projects are already under construction. These include the Gorgon, Wheatstone, Jack/St. Malo and Big Foot projects. Chevron, therefore, remains capable of bringing these projects online even in the weak oil price environment.
Royal Dutch Shell
At over 7.5%, Royal Dutch Shell is quickly becoming a dividend giant. Despite a high payout, the dividend looks fairly safe. Still, investors trade a high initial yield for little growth potential in coming years.
While the stock has always had a high dividend, the yield has jumped from its previous 5% levels as the stock has plummeted. A big part of this has been oils drop from near $110 to its current $40 mark.
Another concern is Shell's plan to acquire BG Group (BG.) for $70 billion. The deal will lead to dilution and analysts fear Shell may have overpaid for the acquisition as the company is offering a 50% premium for shares. Unfortunatley, when Shell announced its plan to acquire BG Group in April, the company said the financials only really work with an oil price of $90 a barrel in 2018.
Still, the acquisition is another sign the company is thinking long term, as its part of the firm's vision to become a leading player in the natural gas market. Shell began producing more gas than oil in 2013 and the company's long-term vision is that demand for gas will increase 60% by 2030 from its 2010 level. The acquisition should make it the largest liquefied natural gas producer in the world.
Still, investors should expect dividend stability over growth projects. In an interview with Bloomberg, CEO Ben van Beurden called its dividend an iconic item, pledging that he would do everything to protect it. Shell has not cut its dividend since 1943. According to van Beurden, Shell will use cash to debt service first, then dividends and then a balance between buybacks and capital investment.
While Chevron may provide a better growth-income combination, if you're looking for an income-producing stock and can forgive a couple of years with no or little dividend growth, Shell deserves a place in your portfolio.
